As mentioned in a previous post, all the ingredients are there to create a pretty noxious soup of inflation and low or negative growth.
Stagflation is a rare occurrence and I believe that the 70s is the only time it has occurred in modern times. It is rare because a recession is usually accompanied by a reduction in demand which in turn will reduce pressure on prices. This is well-known and accepted.
Because wages are not increasing, unemployment is rising and consumers are reducing debt there is expected to be a reduction in overall demand. Accompanying this is a dramatic fall-off in investment and a rise in the costs of imports. If supply in the economy falls faster and further than demand then we have a recipe for stagflation. As to this the inflationary pressures of massive injections of cash into the economy and the stage is set for inflation to rise next year while the economy shrinks.
This may provide the basis for an interesting couple of years of inflation over 5% and growth either negative or close to zero. Are equities the best place for your money in times of stagflation? Cash is certainly not an option. Being a creditor is preferable. The problem remains though, where does an investor place cash? Buffett’s response seems to fit all scenarios. Can we expect therefore that cash will chase equities up rapidly well before we see the end of the current bust?